A Long Term Compelling Investment Story For United States Oil Fund ETF
Summary
- Increase demand in oil consumption as states reopening and airline activity increases will lead to a decrease in current oil inventories.
- Oil future contracts are stabilizing and looking to rebound from the bottom floor share price back in March 2020.
- Longer contracts and pressure push from regulators limit potential high volatility from shorts and traders alike in the future.
- The perfect storm of Saudi & Russia price war, COVID-19, and short-sellers blitzkrieg attack have passed leading to possible long term growth in the share price.
United States Oil Fund (NYSEARCA:USO) ETF has a wild ride and now in a recovery mode. Reopening of states across the US and the world is leading to a higher consumption rate of oil. Airlines and cars are already hitting the road with cruise ships soon to follow in a few months.
Geopolitical factors have provided a much-needed jump start as on April 9, 2020, Saudi Arabia and Russia agreed to cut 10 million BPD and extend further cuts in June 2020.
Saudi Arabia, UAE, Kuwait on May 12, 2020, also wants to voluntarily reduce an additional 1.2 million barrels per day.
The U.S is not part of the cuts and agreement, but major producers are shutting wells across North America. Bankruptcies are already occurring with a few small to medium companies. And Permian hot spots are all slowing down with rig count decreasing with 57% decline to now below 270 from 624 rigs in March 2020. As WTI oil price goes up steadily, North America oil producers would not be able to get the loans from the banks (high risk) and restart their well.
In regards to the oil storage sector, tankers per day went from $25k in February 2020 to now $200k-$300k in April 2020 so companies want to offload the supply even if it is at break-even or a loss. Further increasing consumptions and release of supply.
Current oil inventories have improved drastically and surplus supply has gone down the past few weeks. See chart below with source link -https://www.investing.com/economic-calendar/eia-crude-oil-inventories-75
| Release Date | Time | Actual | Forecast | Previous |
|---|---|---|---|---|
| May 28, 2020 | 11:00 | 7.928M | -1.944M | -4.983M |
| May 20, 2020 | 10:30 | -4.983M | 1.151M | -0.745M |
| May 13, 2020 | 10:30 | -0.745M | 4.147M | 4.590M |
| May 06, 2020 | 10:30 | 4.590M | 7.759M | 8.991M |
| Apr 29, 2020 | 10:30 | 8.991M | 10.619M | 15.022M |
| Apr 22, 2020 | 10:30 | 15.022M | 15.150M | 19.248M |
Favorable Factors for a Long Term Investment:
The worst-case scenario has passed in which it crashed from $100 to $17 losing on the futures contracts as oil of price hit in the negative zone around April 21.
USO doing a heavy 80% front-month contract and a 20% second-month contract. They barely survived with this aggressive contract structure. Now they are spread 10% June, 30% July, 15% August, and a few in December.
My prediction is the inevitable COVID-19 2nd won’t shut down the economy again and OPEC has regained its market share goal in the wake of dozens of US Oil & Gas Operators filing for bankruptcies.
Negative Factors for a Long Term Investment:
Possible to lose it all on the bet if the oil glut continues and it goes back to negative. If USO misses on future contracts, a good chance you’ll lose the majority. However, I see this extreme case as unlikely as USO fund managers have now structured their future contracts over the next few months instead of looking forward to one month.
In a recent SEC filing, sole commission merchant RBC Capital Markets is has taken steps to limit USO ability to buy oil futures and require the fund to invest in oil-related interest, larger amounts of treasuries, cash, and cash equivalents.
Conclusion:
Overall USO's unique structure had multiple weak points in which a short sheller or geopolitical could wreak havoc on the fund. However, USO has now stabilized and naturally structured itself to be a compelling long term investment as the airlines start to fly, more cars hit the road, economy reopens, and manufacturing companies get back to work. As an Oil Fund ETF, this gives a long term investor a great upside potential in share price in the future.
This article was written by
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Comments (38)
opec tries novel strategy to turn oil price curve upside down
www.bloomberg.com/...
I don't think you know what happened inside !